inheritance tax PQ
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othing in this world is certain but death and taxes… Famously quoted by Benjamin Franklin in 1789, this statement could not be more spot on when it comes to one of the world’s most hated but arguably fairest of taxes: inheritance tax. Throughout your ACA journey so far, the birth of the Principles of Tax module presented you with the fundamental rules that underpin the UK tax system. Now, as you continue your journey on to Tax Compliance, you face a tax that explores the inevitable – death. But what does this all really mean for your own personal doomsday – the exam? This article aims to equip you with various exam techniques and tips to help you get over your fear of this tricky topic; provide a solid structure to answering your exam questions that the examiner will love; and make you realise that death and taxes aren’t so gloomy after all!
A fool-proof approach to IHT questions In the exam you’ll be expected to recreate the IHT proforma in full, or certain stages of it, based on the scenario given. As we all know, the proforma itself is a bit of beast! But not to worry, it’s as easy as Stage 1, 2, 3… The first place to start is Stage 1. This is where most of the magic happens, as we have to calculate the ‘chargeable amounts’ – namely, the amounts that are potentially subject to IHT. In approaching this follow these useful steps: 1) Go through each of the transfers in the question one by one, stripping out those that are generally exempt (exam tip: tell the examiner something is exempt to bag an easy half-mark). 2) For those transfers remaining, pop them into your proforma in chronological (date) order. 3) Next, categorise each transfer – are they chargeable lifetime transfers (CLT) or potentially exempt transfers (PET)? 4) Input the transfer values (remember, you will probably have to do some fun workings to calculate these). 5) Finally, deduct any applicable reliefs. The most common ones are APR/BPR, the marriage exemption and the annual exemption. Exam tip: all of these rates are in your trusty Hardman’s open-book
Staying alive Sucheta Sud explains how you can survive IHT questions in the exam hall
text – if you have a mind blank in the exam, use it! 6) And there you have it – your chargeable amounts. Easy! Only when Stage 1 is done and dusted do you move on to Stage 2 for CLTs. This is where you are first introduced to the magical world of the nil-rate band (NRB). Each CLT is entitled to one of these £325k bad boys, but HMRC aren’t going to let you have it that easily – the key rule the examiner is most likely to test here is that you must remember to reduce each NRB by any gross chargeable transfers within seven years of each CLT transfer made. Gotta love anti-avoidance! Once you’ve nipped that in the bud, pay the lifetime tax at either 20% or 25% (as instructed in the question) and before you know it, you’re all done with Stage 2. Exam tip: if there aren’t any CLTs in your question (you only have PETs), simply skip Stage 2 and move onto the final stage. Stage 3 is where things get interesting. Deadly interesting. By this point, you’ve already racked up loads of marks in the
first two stages. Now you’ve arrived at death’s door for the final curtain call. Here’s a few tips to help you finish it off once and for all: 1) First things first: remember the golden ‘seven year’ rule – death tax is only chargeable on transfers that occur within seven years of death, and on the death estate itself. So you can now ignore any other transfers before that time. 2) Next, deduct the various reliefs where applicable (exam tip: watch out for the residential nil rate band – big hint in the exam is that the individual left their home to their kid/grandkid). 3) Pay the dreaded death tax at 40% (exam tip: remember, it could be lower at 36% if enough of the death estate is left to charity). And that’s it! Not as bad as you thought, right? So when death inevitably comes knocking on your exam door you’ll be armed and ready with all these tax tips and reliefs to show who’s boss. Invincible! PQ • Sucheta Sud is a tutor at Kaplan Financial
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PQ Magazine March 2019
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